

Summary
- After rising steadily since the year began, equity markets finally retreated on second thoughts about whether the Federal Reserve (Fed) will cut rates in H2 2023.
- Barring a major surprise when the January Consumer Price Index (CPI) is reported on Valentine’s Day, we expect equities to continue trading in the current range.
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Summary
- After rising steadily since the year began, equity markets finally retreated on second thoughts about whether the Federal Reserve (Fed) will cut rates in H2 2023.
- Barring a major surprise when the January Consumer Price Index (CPI) is reported on Valentine’s Day, we expect equities to continue trading in the current range.
- The major signal from earnings reports is that companies expect the economy and earnings to weaken in H1, but the outlook for H2 ranges from bullish to outright negative to no visibility.
- About 140 companies report this week. Headliners include Avis Budget Group, Coca-Cola, Zillow, and Deere & Co.
What We Learned Last Week
Equity markets are having second thoughts about the upward-and-onward trade that depends on the Fed easing in H2. After reaching a closing high for the week on Tuesday, the S&P 500 dropped 1.8% and the NASDAQ 100 fell 3.3%. The next big turn could be on Tuesday (Valentine’s Day), when the CPI for January comes out. Unless it shows a sharp and sustainable decline, we expect equities will remain within the trading range that has prevailed since May 2022.
But we are less convinced that the risks remain tilted to the downside, at least for now. The labour market is too strong; the unwind of the pandemic economy is still in full swing; inflation is still visibly trending downward.
Lastly, as we noted last week, SPX hit a ‘Golden Cross’ (where the 50-day moving average crosses the 200-day moving average) a week ago. This has proven a strong bullish technical signal over the past century. The market may have difficulty rallying much from present levels, but only a sharp shock will trigger a golden cross reversal (a so-called ‘Death Cross’) within the next few weeks.
So far, earnings season offers few clear signals about the outlook. Probably the most frequent comment by companies is that they expect business conditions to be on the soft side during H1, with activity rising in H2. But many companies also expect soft conditions to persist in 2H, or lack visibility about the 2H outlook.
A second theme is that companies exposed to advertising (e.g., Fox Corporation, News Corp, New York Times, Pinterest) generally reported soft demand for advertising and no indication of rising demand recently or later this year. If companies are holding back on advertising, they are clearly not confident about the near-term outlook.
Consider the consumer discretionary sector. Cruise operator Royal Caribbean Cruises Ltd (RCL) reported a smaller-than-expected loss but rallied nearly 9% when it said 2023 bookings were running ahead of pre-pandemic levels. Toy maker Mattel (Barbie dolls, Hot Wheel cars, etc.) had a disastrous holiday season; its stock plummeted 13%. In the luxury goods sector, Ralph Lauren (RL) and Tapestry (Coach, Kate Spade) reported much better than expected earnings and outlooks. Capri Holdings (Michael Kors) and high-end sportswear vendor Under Armour (UAA) reported poor results and are resorting to discounts to move inventory.
In the consumer staples sector, meat packer Tyson Foods (TSN) was hurt by fluctuating prices of livestock and consumers switching away from more expensive brand-name meats. Pilgrim’s Pride (PPC), which focuses on chicken products, reported strong earnings and outlook, apparently because consumers ate more chicken. Major food companies Kellogg (K) and PepsiCo (PEP) both reported better-than-expected results due to raising prices – but at the cost of lower volumes. That could be a positive (people must restock at some point) or a negative (volume declines may outrun the ability to raise prices to cover rising costs).
These kinds of differential performance pairs keep coming up. Part of it is clearly because some companies failed to fully anticipate the reopening last year and mistakenly stocked up on goods popular during the pandemic. Other companies probably hit headwinds related to higher rates sooner than others.
The bottom line is that we are firmly in an economy where visibility is murky, and everyone is feeling their way forward.
The Week Ahead
About 140 companies in our Russell 1000 universe report in coming days. It will again be an eclectic mix of companies across the sector spectrum. Some of the highlights include Avis Budget Group, Coca-Cola, Zillow, and Deere & Co.
More importantly, when they happen, they tend to persist, with the 50-day moving average remaining higher than the 200-day moving average for extended periods (Chart 2). Equities often rally strongly after the golden cross, but they also may settle into an upward trending trading range.
Of the 50 golden crosses in our dataset, only a few reversed within a week or so. One was at the end of 2015, as equities sold off earlier in the year, rallied, then sold off again as negative interests and an oil glut weighed on markets and investors turned more defensive (Chart 3).
Monday
- Can Avis Budget Group (CAR) match the solid performance of Hertz (HTZ), or will it be weighed down by lower used car prices?
- Palantir Technologies (PLTR), which produces data analytics software, may give insight into corporate CAPEX plans for technology solutions.
Tuesday
- If RCL is any indication, Airbnb Inc (ABNB) and TripAdvisor (TRIP) will say consumer demand for travel experiences is still rising, while Marriott International (MAR) will report on business travel activity.
- Coca-Cola Co (KO) will surely echo the strong results of PEP; but at what cost to volumes?
Wednesday
- At-home alcohol consumption soared during the lockdowns – Boston Beer (SAM) may indicate whether consumers have shifted their drinking to restaurants and bars.
- If the supply-chain issues that dogged Cisco Systems (CSCO) in 2022 are receding, it could benefit from companies upgrading their technology infrastructure.
- Zillow Group (Z) will be closely watched for any outlook about the sluggish housing market.
Thursday
- Will toymaker Hasbro (HAS) succumb to the issues that hampered MAT?
- People are still eating out despite higher restaurant checks – DoorDash (DASH) will indicate whether they still having those meals delivered to their homes.
- It will be interesting to see if Reliance Steel (RS) is as bullish about 2023 as its competitors (US Steel, Nucor) are.
Friday
Will farm and heavy equipment maker Deere & Co (DE) match Caterpillar’s growing order book and bullish outlook?